One of the most important factors in getting a mortgage to buy a house is your credit score. Your credit score is a number ranging from a low of 300 to a high of 850 that represents your creditworthiness. Higher scores indicate less risk to the lender.
Using FICO, the most often used model by lenders, a score of 800 or higher is considered exceptional; 740 to 799 is very good; 670 to 739 is good; 580 to 669 is fair; 579 or lower is poor.
Your credit score is based on your credit history, which includes the number of open credit accounts, total levels of debt, and your repayment history. Credit scores are crucial to a lender when deciding whether to approve a loan for a loan applicant and in evaluating the applicant’s reliability in making payments timely.
How Your Credit Scores Affects The Amount Of Mortgage Interest You Will Have To Pay
Your credit score is one of the most important factors in determining your interest rate. In short, the higher your credit score, the lower the interest rate you will have to pay.
Consider how much difference even a fraction of a point of interest can make in your monthly mortgage payment and over the life of the loan. For example, on a $200,000 loan with a 3.5% interest rate versus a 4.0% rate, your monthly payments are $56 less. Over the life of a 30-year mortgage, that amounts to $20,427. For more information about how credit scores affect mortgage rates, you can use the loan savings calculator at myFICO.com.
Benefits Of High Credit Scores
As indicated above, the primary benefit of a high credit score is you will pay less interest on a mortgage loan. For many borrowers, paying less in interest means they can afford to spend more for a home.
With a credit score of 720 or higher, you may be able to qualify for a “jumbo loan.” Jumbo loans have loan amounts that exceed conforming loan limits — currently around $484,350. Jumbo loans have the most stringent requirements for qualifying because of the increased risk to lenders.
Options For Bad Credit Scores
If your credit score is on the lower side, you may still be able to qualify for a good mortgage. Some options to consider include:
A conventional loan is a mortgage loan that is not insured or guaranteed by the government. Conventional loans are backed by private lenders, and their insurance is usually paid by the borrower. If your score is no lower than 620, you may be able to qualify for a conventional loan but you may have to meet certain other conditions, such as a higher income or higher down payment.
FHA loans are guaranteed by the Federal Housing Administration. FHA loans are designed for borrowers with less than stellar credit and have low down payment requirements. If your credit score is between 500 and 579, you may be able to qualify for an FHA loan with a 10 percent down payment. If your score is 580 or higher, you can put down at least 3.5 percent.
VA loans are guaranteed by the U.S. Department of Veterans Affairs for active and veteran military personnel and their families. Most lenders require a minimum credit score of 620 for a VA loan.
The U.S. Department of Agriculture guarantees USDA loans for low- to moderate-income borrowers seeking to purchase a home in a rural area. Borrowers generally need a minimum score of 640 to qualify for a USDA loan. In some cases, USDA lenders will consider a lower score with additional analysis of a borrower’s credit.
How To Improve Your Credit Score
If you need to improve your credit score to qualify for a mortgage loan, you can take some steps to do it. You will need to defer your home purchase while you do it:
- Check your credit report and correct any errors before you apply for a mortgage loan. Get a free copy of your credit reports from the three major credit reporting agencies: Experian, Equifax, and TransUnion. If you find inaccurate or missing information, you can follow their instructions for getting the information corrected.
- Pay down all credit card balances to below 30 percent of your credit limit. Lenders prefer to see credit utilization of 35 percent or less.
- Pay all bills on time. Late payments remain on your credit report for seven years. Your payment history accounts for 35 percent of your credit score.
- Keep unused, older credit lines open after paying them off. Closing unused accounts can actually cause your credit score to drop due to the way the credit utilization factors are calculated.
- Do not open any new lines of credit or take out large loans. The less debt you have, the better your score will be.
- Once your credit has improved, begin rate-shopping. However, try to shop within a 30-day window because spreading out your rate inquiries can negatively affect your score.
Talk Over Your Options With Fairfax Mortgage
For help figuring out the options available to you, contact the mortgage experts at Fairfax Mortgage. They can answer your questions and find a mortgage on competitive terms that is tailored to your needs.